Question

The following income statement is for X Company's two products, A and B:

			Product A	Product B
Revenue			$93,000	$91,000
Total variable costs			53,940	50,050
Total contribution margin			$39,060	$40,950
Total fixed costs
Avoidable			17,429	29,104
Unavoidable			12,621	21,076
Profit			$9,010	$-9,230

If X Company drops Product B because it shows a loss and is able to use the vacant space to increase sales of Product A by $38,700, with $3,800 of additional fixed costs, what will be the effect on firm profits?

Answer 1

· Profits will INCREASE by $ 608

A	Contribution margin of 'A'	$39,060
B	Revenue of 'A'	$93,000
C = A/B	CM Ratio	42%
D	Additional sale of 'A'	$38,700
E = C x D	Additional contribution margin of 'A'	$16,254
F	Additional Fixed cost of 'B'	$3,800
G	Loss on Contribution margin of 'B'	$40,950
H	Avoidable Fixed Cost of 'B'	$29,104
I = E-F-G+H	Profit will Increase (Decrease) by	$608